Contamination is discovered at your recently purchased commercial property…are you potentially liable for cleanup of the contamination? Who is potentially responsible? Owners and operators at the time of the release, parties that transported hazard substances to and from the property, parties that arranged for hazard substance disposal or treatment, and owners after the release are considered potentially liable and could be among the Potentially Responsible Parties (PRPs) accountable for the cleanup of contamination.
As a purchaser or owner, you could be liable unless you meet certain requirements. Ignorance is not a defense. Not contributing to the contamination is not a defense. Even if you did not know the laws, did not know about the contamination prior to purchasing your commercial property, or did not contribute to the contamination, as an owner of the commercial property after the release is discovered, you could be a PRP.
What happens if you do get caught up in this web of liability? Some potential consequences may include CERCLA liability for the purchaser and other users of the Phase I (being “on the hook" for thousands or millions in cleanup), property/collateral devaluation as a result of existing contamination, bad publicity, lawsuits from exposure of personnel to contaminants, costs associated with contaminating neighboring properties, etc.
Protections are available to the purchaser of a commercial property. If certain threshold criteria are met and All Appropriate Inquiries (AAI) were performed in accordance with 40 Code of Federal Regulations (CFR) Part 312 prior to acquiring a property, three avenues of defense may exist for CERCLA liability: bona fide prospective purchaser (BFPP) liability protection; innocent landowner (ILO) defense; or contiguous property owner (CPO) defense. The BFPP liability protection allows prospective landowners to obtain protection from liability if they purchase a property with known contamination, provided they meet certain pre-and post-purchase requirements. The ILO defense protects parties that acquire a property and had no knowledge of the contamination at the time of purchase. The CPO defense protects parties whose property is contaminated from a release on a neighboring property.
Buyer Beware – A Phase I Report with omissions and deviations from AAI will not meet the AAI criteria necessary to obtain the protections mentioned above. Among other things, failure to obtain adequate historical sources, conduct a thorough site reconnaissance, interview the owner or owner’s representative, or to obtain the required regulatory file reviews (or to provide a reason why the files were not reviewed) can void AAI protections. Other common omissions or deviations to the report may be that responses from local regulatory agencies regarding environmental concerns on the property are not obtained or that releases at or near the property are incorrectly dismissed or misinterpreted.
Buyer Beware – The qualifications of the party performing environmental due diligence is generally unregulated by federal, state and local entities. No professional license is required for the environmental consultant performing the Phase I ESA. The Environmental Professional (EP) who is required to sign off on the Phase I ESA report self-certifies that they are qualified and have supervised the staff completing the work. There are no specified testing or continuing education requirements for the EP. There are no minimum credentials for those conducting the detailed task work or analyses within the report, and environmental consultants are not required to have insurance for Phase I ESA reports. In addition, caution should be taken in using a consultant with prior experience at the property, as this is commonly a conflict of interest for the consultant and may not be favorable for the purchaser.
To be protective of the client, the Phase I report must meet AAI requirements for an inquiry by an EP. A contractual requirement that the Phase I ESA should conform to the American Society for Testing and Materials (ASTM) E1527-21 Standard Practice for Environmental Site Assessments: Phase I Environmental Site Assessment Process is typically used to comply with AAI EP inquiry requirements. However, due to the unregulated and price sensitive environment, reports may be produced that fall short of this standard. Generally, the only protection the client has from an incomplete report and negligence by the consultant is governed by the terms in the agreement between the consultant and Client. Because these agreements are frequently drafted in a proposal prepared by the consultant, the proposed liability terms are commonly very favorable to the consultant, with limited remedies available to the Client (such as liability limits capped to the fees paid to the consultant for damages from substandard services). An EP that provides an incomplete or inaccurate report may not stand to lose much; however, the client may stand to lose a lot. Best practice is to carefully review the proposed agreement and negotiate mutually acceptable terms and conditions.
A knowledgeable, experienced, and reputable environmental consultant guiding the Phase I ESA process, can provide a purchaser with invaluable peace of mind, knowing they are being protected and qualifying for CERCLA liability protection. The final part of our series on Phase I ESAs, “How to Protect Yourself,” comes out next month.